Poor families least likely to gain from tax-free scheme

Both schemes confirmed by the Chancellor in last week's Budget do not come into play until after the general election.

The Resolution Foundation's analysis shows that at most four in ten working families with children on universal credit will be eligible for the more generous level of support to have 85 per cent of their childcare costs met.

The group most likely to be excluded from receiving 85 per cent of their childcare costs paid will be the lowest income working families on universal credit with one or more parents working part-time on low pay.

This contrasts with the tax-free childcare scheme for better-off families who can claim 20 per cent of their annual childcare costs, up to £6,000 a year.

The tax-free childcare scheme has been criticised because households where both parents earn up to £150,000 each will be able to take advantage of it, while families where one parent works part-time or stays at home will not be able to sign up for the vouchers.

In the Budget the Government extended the right to tax-free childcare to all working families, initially with children under five, from autumn 2015, but crucially both parents, or one in a single-parent family, must be working to be eligible.

However, around 200,000 families will still receive significantly more help than they would have done prior to universal credit as they are eligible to claim when they work less than 16 hours a week.

Sixty-eight per cent of those who are eligible for either type of support are in the top 40 per cent of the income distribution (80 per cent for the vouchers and 24 per cent for universal credit). Only 5 per cent of families who are eligible for either type of support are in the bottom 40 per cent (all on universal credit).

For families who receive childcare support through tax credits, an extra £200m will be provided through universal credit, which is equivalent to 85 per cent of childcare costs for households qualifying for it, where the lone parent or both parents pay income tax.

This will be phased in from April 2016 as childcare support moves from tax credits into universal credit and will be funded from social security budgets at the time.

Chancellor George Osborne announced in the Budget that he would be raising the income tax threshold to £10,000 from 2014.

However, in order to qualify to have 85 per cent of childcare costs paid through universal credit all adults in the family must be in work and crucially earning enough to pay income tax.

For families on the minimum wage the Resolution Foundation said that each parent would need to work an average of 25 hours a week to earn enough to pay income tax.

In a family with a household income of £24,000, where one parent might earn £16,000 a year working full-time and the other a part-time worker on £8,000, this family would not be eligible for the extra support.

Vidhya Alakeson, deputy chief executive of the Resolution Foundation (pictured), told Nursery World, 'That's why you end up knocking a lot of people out. We would argue that you should get rid of the income tax rule.'

She added, 'Overall the distribution of where support is going is towards the better-off families. Among the poorest families, only 5 per cent of families are benefiting at all.'

'It's really common to have a full-time worker and a part-time worker, which means the family won't be eligible. That's why it's still the richer families within universal credit that benefit from this support. For the vast majority on universal credit the changes won't help them.'

Ms Alakeson added, 'Only a minority of working families in universal credit with children - 40 per cent at most - will be eligible for the new 85 per cent rate of childcare support. The rest have someone in low-paid, part-time work and so won't benefit.

'It is completely wrong that these working families will be excluded from new support at a time when families on up to £300,000 will benefit from childcare vouchers.

'The Government should be applauded for attempting to help families struggling with the costs of childcare but the truth is that those who are struggling the most are missing out.

'We are left with a complex two-tier system of childcare support within universal credit that gives less support to the least well-off.'